2 Ripe Pair Trades (And One Future Possibility)

Following our success with “pairs trading” in 2011, we initiated two more during the latter half of 2012 and both have proven to be quite profitable over a relatively short 4-6 month period.

First there was our comparative analysis of Timmins Gold (AMEX: TGD; TSX: TMM) versus Argonaut Gold (AR.TO) in July 2012. Both companies can be described as unhedged, debt free, similar cost, growing gold producers with heap leach open pit operations in Mexico. This made for a direct comparison that saw merit in going long Timmins and short Argonaut on the basis of fundamentals. The following chart reveals a roughly 38% gain on this trade as valuations reverted to the mean during the second half of 2012 (assumes no leverage from trading on margin):

More recent was the more unusual (for us) social media pairs trade that went long Facebook (FB) and short LinkedIn (LNKD) after we noticed significant price divergence following Facebook’s poorly orchestrated IPO in May 2012.

We posited that at worst the future prospects of these two social networking companies are tied together and at best Facebook has business and revenue opportunities that are superior to LinkedIn. The pairs strategy ended up working out splendidly even as LinkedIn traded flat given that Facebook has gained over 50% in the meantime:

Although both these “pairs trades” could still run a bit further, we’re going to formally close them out and harvest our (theoretical) profits rather than risk the situation growing overripe. Will we have more of these trades? You bet, we’re currently investigating a long Osisko Mining (OSK.TO) and short Detour Gold (DGC.TO) pairs trade, among others.

Disclaimer: We do not currently own any of the companies mentioned herein; any discussion of “trading” in this analysis is hypothetical and were not executed in accounts owned by Augment Partners or its principals. No compensation has been received from any of the companies mentioned. This is not investment advice; should you seek investment advice we recommend you discuss the company with a licensed investment advisor or broker.